What Is Reasonable Cause For Penalty Abatement?
Reasonable cause for penalty abatement is defined in the Internal Revenue Code under section 6664C and in the Treasury Regulations which explain the revenue code section. The reasonable cause for penalty abatement can include reasons such as reasonable reliance on a tax professional or written reliance on the IRS themselves. It can also include a death in the family, or something else that caused the arrears to occur. It can include substantial authority meaning if you were relying on tax law precedent or a court case from the tax court or federal circuit court on the position that you were taking on the tax return.
What Is The Process Of Requesting And Filing For A Penalty Abatement?
The process for filing penalty abatement depends on where your case is, whether you are undergoing an audit or whether you are already in collections with the IRS. If you are under examination, an examiner will issue an audit report and sometimes they will include an accuracy-related penalty or fraud penalty, whatever they feel should apply. You can dispute that penalty once that proposed balance due comes out by writing a letter to the examiner basically explaining why you believe the penalties should not apply. If you’re still in disagreement, you don’t have to accept the exam report. Even if you accept the outcome of the audit, you can still appeal the penalty portion or file a petition with US tax court to dispute that penalty.
If it’s an assessed balance, meaning you are currently in collections, then you file for a penalty abatement by filing form 843, a request for refund or abatement. In that form, you will explain the reasons that you’re relying on to request the penalty abatement. Generally speaking, you have to state some type of reasonable cause that you are relying or oftentimes, if you don’t have a reasonable cause, you can try to throw yourself at the mercy of the IRS and state that you’ve always filed and paid your taxes on time, that this is the first time you’ve made a mistake and even though it’s entirely at that point up to the discretion of the IRS, sometimes they will approve the penalty abatement if they see you have a good tax filing compliance. If you did file a request for penalty abatement, then if it comes back, you can appeal that decision and if you pay the balance due, you can even file a suit in the district court if the IRS continues to disallow the request for penalty abatement through the appeals process.
What Are Other Options If Penalty Abatement Doesn’t Work?
If penalty abatement doesn’t work, you can dispute it depending on if it’s in an audit process to US tax court or you can pay the balance and file a suit in federal district court. If penalty abatement doesn’t work, you can attempt to reduce your balance due by filing an offer in compromise. That’s an option as well. You can try to get the Taxpayer Advocate Service involved too.
How Much Will I Need To Pay With An Offer In Compromise?
An offer in compromise is a discretionary program with the IRS. Basically, it’s a program that they started to help taxpayers get back into tax compliance and the amount that you will have to pay depends on what the IRS calls your reasonable collection potential. The IRS will evaluate your entire financial situation, look at all your assets, all your liabilities with those assets, your income, the income of your spouse and then they will take all your assets into account, all the equity you have in all assets and also your monthly disposable income for the household after all expenses are taken into account and then they’ll come up with the minimum amount that the IRS will generally settle for. So, the amount can really vary depending on your financial situation.
It could be as little as $500, it could be as much as $500,000, it just depends on the person’s financial situation. Not everyone will qualify for an offer in compromise since it is based purely on the person’s financial situation.
How Long Does It Take To Get An Offer In Compromise?
To get an offer in compromise, the process can take anywhere from four months up to two years. By statute, the IRS has to answer your offer in compromise within two years. If they do not answer it within two years, then your offer is automatically approved. But unfortunately, because of the lack of resources, they are taking a very long time to process offer in compromises. The good news is while your case is on offer in compromise pending status, all collection action against you must cease so the IRS cannot take any levy action. They may file liens against the property to protect their interest but they cannot take any levy action against bank accounts, wages or any real or personal property that you may have.
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